13th June 2016

Limitation Period for Loans

The High Court recently considered when the limitation period begins to run in respect of a loan where there is no deadline for repayment.

The court concluded that a payment made by the lender to the borrower was not a loan but a payment in respect of the borrower’s role in a project but it went on to consider the borrower’s argument that if the payment had been a loan the lender’s claim was out of time and therefore barred.

As most readers will know, an action founded on simple contract cannot be brought more than six years from the date on which the cause of action arose (see: section 5, Limitation Act 1980). Historically, at common law, a loan was treated as being repayable immediately (that is upon advance) if the terms governing it did not state a repayment date or stated that it was repayable on demand. This meant that, generally speaking, the lender’s cause of action arose when the loan was made and the limitation period would run from that time. The Limitation Act (in section 6) qualifies the rule in section 5 so that, where it applies, limitation runs from the date of written demand for repayment, rather than from the date when the loan was made. For section 6 to apply, it has to be that the contract does not effectively make the obligation to repay the loan conditional on the lender making a demand for repayment.

Although the borrower claimed that the loan was repayable on demand, the court found there was no express term to that effect and it could not possibly be the case that the arrangements contemplated repayment being conditional on a demand being made. Therefore, if the payment had been a loan the cause of action accrued when the borrower made written demand.

One further note. In relation to more ‘informal’ arrangements between family members or friends, it may be the case that there is no intention to create a legal relationship. In fact, there is a presumption in relation to spouses or family members that there is no intention to do so. So if matters turn difficult, then there is no contractual basis for a claim to be brought.

Find out more information on contracts and general legal disputes by contacting Alex Lee on alee@bussmurton.co.uk or 01892 502 362.

Alex Lee

Alex Lee